Bolivia Steps on the Gas

Bolivian President Evo Morales is taking a risk in nationalizing his country's natural gas fields--but it reflects growing discontent across Latin America over unfair deals with banks and private oil companies.

By

May 11, 2006

Bolivia’s natural gas reserves are estimated to be worth about $100 billion. Still, the nation remains the poorest in South America. Evo Morales, the country’s first indigenous president, was elected with record-high support in December precisely because he promised to nationalize Bolivia’s natural resources. Ordinarily that means expropriating private property. But in this case, despite the alarms rung by the US press, Morales is demanding something far less radical: He wants oil companies to renegotiate their contracts so Bolivians get a larger share of the profits.

No candidate could have won the election without promising some form of nationalization. Popular protests have led to the ouster of two presidents in the past three years because Bolivia’s natural gas industry wasn’t doing nearly as much for the country as for the foreign oil companies controlling it. When I traveled to Bolivia this past winter, even energy-industry insiders who’d helped draft the country’s privatization plan a decade ago agreed that the deals struck between the oil companies and the government–giving Bolivia only 18 percent of oil and gas profits–were now untenable. “When the law was written, the price of oil was around $15 a barrel,” said Mauricio Gonzalez, president of the national oil company and energy minister under President Gonzalo Sanchez de Lozada, who in the 1990s oversaw the industry’s privatization. “They focused on generating growth and forgot about redistribution.”

Under that 1996 law, urged by the World Bank and IMF, Bolivia sold the bulk of its oil and gas industry to private companies and put production, sales and pricing in their hands. Since then Bolivia’s estimated natural gas reserves have certainly grown: Analysts believe the country has ten times as much gas as it once thought–54 trillion cubic feet. World Bank officials now admit the low royalty and tax rates have been a bad deal for Bolivia.

Morales was elected in the wake of Bolivians’ mounting protests. “Gas is Bolivian!” demonstrators shouted as they massed outside the presidential palace before the ouster of President Carlos Mesa a year ago. “We want to nationalize, to participate in the production train,” Oscar Olivera, a leading Bolivian activist, told me when I visited him in Cochabamba. “It’s the only way to recuperate the gas for us.” So on May 1 Morales announced that the state was retaking Bolivia’s gas fields. To underscore his point, he sent troops to guard them, and he immediately hiked taxes on the two biggest fields. “The looting by foreign companies has ended,” Morales declared. Companies must sell 51 percent of their holdings to the Bolivian government and renegotiate their contracts within six months.

Morales’s move was surely inspired by Venezuelan President Hugo Chávez, who in March announced that he was converting thirty-two private oilfields into joint ventures with the Venezuelan government and doubling the country’s take per barrel. But Morales doesn’t have the power of Chávez: Bolivia’s gas reserves aren’t nearly as valuable as Venezuela’s oil. How far he’ll be able to take his plan remains to be seen. “As always with the complicated gas issue, the devil remains in the details,” says Jim Shultz, executive director of the Democracy Center, a Cochabamba-based advocacy group. It’s not yet clear whether Morales’s move is merely the first step in a restructuring of Bolivia’s gas industry or nationalist bluster that won’t stand up to hard negotiations with the oil companies. To some extent that will depend on how valuable the companies believe Bolivia’s gas really is. If they can still make a profit, they’ll stay and negotiate. If it’s not worth the cost, they’ll leave–and will certainly sue the government in international arbitration for millions in damages.

As negotiations proceed over the next six months, the companies will be using the threat of arbitration as a sword of Damocles hanging over the country. They’ll also emphasize that if they leave, Bolivia will have neither the cash nor the expertise to exploit its resources fully. If Morales stands up to them, it may be because he’s counting on the continued support of Chávez, his compañero and benefactor. The Venezuelan president has increased aid to Bolivia as he moves to consolidate his power in South America and encourage opposition to the United States and its trade agreements. Indeed, just before his May 1 announcement, Morales joined Chávez and Cuban leader Fidel Castro in the Bolivarian Alternative for the Americas, a regional challenge to the US-supported Free Trade Area of the Americas; it would eliminate most tariffs between members, promote investment and advance technical and educational cooperation. Already, Cuba has sent nurses and teachers to Venezuela and Bolivia, and Venezuela is providing its partners oil at reduced prices. The US reaction to Morales’s latest move has been decidedly muted–a sign that Washington knows its stock in the region is low and is treading lightly to avoid provoking further hostility.

Will Morales’s moves further drive up the price of natural gas on the world market? Maybe. But it’s senseless to blame leaders like Hugo Chávez and Evo Morales for turning the high price of oil to the benefit of their own people. Ultimately, it’s the shortsightedness of the multilateral banks and private oil companies that’s produced growing discontent across Latin America. The region’s democratically elected leaders now have little choice but to respond.